The current debate over a looming cost-of-living crisis (driven in large part by skyrocketing energy bills) brings to mind the famous “politician’s syllogism” from Yes, Prime Minister: “We must do something. This is something. Therefore, we must do this.”
The two policy responses being called for most frequently are cutting VAT on energy and delaying the planned National Insurance increase. Neither would be a sensible response to the crisis. But they are gaining traction because they play into the political needs of both the opposition and parts of the Conservative Party. They are a perfect example of why good politics and good policy are not the same thing.
Many of us will feel worse off as the cost-of-living squeeze bites. But it isn’t a “crisis” for the whole country. It’s only a crisis for two groups of people: those on low incomes who will face genuine hardship, being unable to afford the essentials and avoid debt because of rising prices, and politicians facing the voters’ wrath in the media, polling and the May local elections.
From a policy perspective there should be twin priorities. First, protecting those at risk of real privation from the immediate pressures. Second, tackling the underlying drivers of the emergency and working out how to prevent future crises.
Cutting VAT on energy would do neither. It is expensive and badly targeted. VAT on energy is 5 per cent, so cutting it would make only a marginal difference to the rises expected in April. For those on low incomes, it would do very little to relieve the coming pain. For those on higher incomes, it would only make up a very small part of their overall budget. And, although energy costs make up a bigger proportion of spending for those on lower incomes, in cash terms it is those who have larger houses and can afford to spend a lot on energy who would gain most from a VAT cut.
So why have Labour and some Conservative politicians been calling for it? Because it’s good politics. The opposition needs to challenge the government with arguments that cut through and can be fitted to the narrative that only Labour understands the realities of life for ordinary people. The VAT cut is perfect for that. It’s easy to explain as a direct way of helping lots of people with energy bills. It makes for a great soundbite. On the Conservative side, the ability to cut VAT was one of the promised “Brexit dividends.” That makes it an attractive option, especially given how thin on the ground such dividends have been so far, and with increased disruption expected this year as more trading barriers come into effect.
Delaying or abandoning the National Insurance rise would be an even worse response to the current situation. It’s true that it would have been better for Chancellor Rishi Sunak to raise income tax rather than National Insurance to pay for health and social care spending. But National Insurance is still a progressive tax, with those in the richest half of the population paying the highest amounts. Cancelling the planned rise in April would do nothing to help many of the people facing the harshest impacts of rising bills—those out of work and the lowest earners. It would give the most help to higher earners, who have far more scope to weather rising bills without having to cut back on the basics.
So why are some leading Conservatives calling for such an announcement? Because it’s good politics. Or rather, a tax rise at the same time as bills go up is extremely bad politics, especially just before local elections.
“Our history is littered with good policy ideas torpedoed by bad politics and bad policies enacted because they make political sense”
By contrast, the best policy responses to cushion the immediate impacts of rising bills for those facing hardship are tricky to fit into a soundbite and don’t particularly help the political narrative for either party. Boosting Universal Credit and “legacy benefits” for those out of work or on low hours (because energy costs are only one pressure threatening to overwhelm those relying on increasingly inadequate support). Reforming the Warm Homes Discount to offer more help and reach more low-income working-age families. Spreading the cost of supplier failures to prevent the entire bill landing on consumers this year. Shifting environmental and social levies off energy bills and onto income tax. Labour’s most recent announcements have helpfully moved to incorporate more targeted action through the Warm Homes Discount, while retaining the call for reduced VAT.
Policies to address longer-term drivers of the current situation are similarly ill-suited to a political and media debate dominated by short-termism. The government can do little about global trends driving inflation, but it should rethink many aspects of our social and economic systems which are compounding, rather than mitigating, the impact of those trends.
The structure and regulation of the energy market clearly require an overhaul, as do the UK’s storage facilities. We need to see more progress on home energy efficiency. As a recent Citizens Advice report laid out, Ofgem allowed “unfit and unsustainable energy companies to trade with little penalty” and has failed to enforce existing rules or protect consumers. More broadly, our economy and social institutions now leave large groups of those at the bottom at constant risk of not being able to pay for the weekly shop and keep up with rent and bills. The cost-of-living crisis is not an unexpected event. It’s just the latest manifestation of weakness at the heart of our economy. The constant thread throughout the pandemic has been a lack of resilience across public services and supply chains, with the consequences borne by communities and families who themselves have insufficient resources to cope with additional pressures.
Making genuine progress will mean overcoming the frequent conflict between politics and policy. Our history is littered with good policy ideas torpedoed by bad politics and bad policies enacted because they make political sense. Philip Hammond’s 2017 attempt to raise National Insurance for better off self-employed people and Theresa May’s “dementia tax” were reasonable approaches to achieve their stated goals, derailed by political ineptitude and catastrophic for their champions. George Osborne’s Benefit Cap was (is) a terrible policy, even on its own terms, but extremely politically successful. Ed Miliband’s proposal to slash tuition fees was questionable policy but politically savvy.
More recently, the current government’s social care policy was the product of an attempt to reconcile clashing political imperatives, and ended up as little more than a tax rise for workers and a giveaway to wealthy homeowners, particularly in the southeast of England. It is uncertain whether the money will ever actually make it into the social care system. The policy makes no attempt to address the quality or coverage of social care provision. It runs counter to levelling-up ambitions. It is bad policy. But it is the logical conclusion of political pressures facing the people whose support was necessary to do anything at all.
We now risk the government bowing to political pressure and abandoning the National Insurance rise while enacting the VAT cut. That would be the worst of both worlds: two blows to the public finances—and so even less money available for public services and investment to drive growth—while still leaving those facing the greatest hardship this year with inadequate support.